Part II: Loss Costs and Loss Cost Multipliers

Our blog series, The Basics of Commercial Lines Ratings , offers a refresher course on the fundamentals.

In Part I , we looked at the components needed for developing a commercial property rate. In Part II , we'll explore loss costs and loss cost multipliers.

Loss Cost

The words used to define loss cost can differ between sources, but all the definitions have the same meaning. The International Risk Management Institute (IRMI) considers loss cost “pure premium.” Overhead costs and profit loading are not included, only “actual or expected cost to an insurer of indemnity payments and allocated loss adjustments expenses.” (You can read IRMI’s full definition of loss costs here .)

To use a loss cost correctly, it's important to understand
what it includes, and what it excludes

Related:
WSRB's Essential Guide to Commercial Property Risk Assessment

WSRB defines loss costs as the portion of a company’s rate component covering only losses, along with the costs associated with settling those losses.

The largest component of a loss cost is the provision for losses and loss adjustment expenses. This includes the payment the insurer makes to the insured under the terms of the insurance contract. This payment provides for future loss adjustment expenses such as:

• Fees for expert witnesses.
• Salary and overhead for outside legal counsel.

Loss cost multiplier

The loss cost multiplier is a company’s expense provisions. Each company must determine its own expense provisions, including those for underwriting profit and contingencies. Then, the company needs to file these provisions with the Washington Office of the Insurance Commissioner .

In addition to profit and contingencies, a company-filed loss cost multiplier includes expenses such as:

• Commission paid to agents and brokers.
• Sales and marketing expenses.
• General company expenses for rent, payroll, and employee benefits.
• Taxes, licenses, and fees.

Rate

Multiply the loss cost by the company’s loss cost multiplier to determine that company’s rate.

Loss Cost x Loss Cost Multiplier = Rate

WSRB does not provide rates. Rather, we provide our subscribing companies with Advisory Prospective loss costs. You can find specific loss costs for commercial properties by logging into the Subscriber portion of our site and selecting the loss cost tab. Along with the loss cost, you’ll also get a commercial property report for your risk file.

Loss costs and loss cost multipliers are straightforward. Part III in our series deals with something that’s not so straightforward: coinsurance.

Terry Krueger was WSRB's Senior Subscriber Services Analyst until her recent retirement. She joined WSRB in 2005 after many years in the insurance industry, working in commercial lines rating and underwriting.